On brink of bankruptcy, Detroit suspends some debt payments

DETROIT — Detroit, on the brink of bankruptcy with $17 billion in liabilities, will suspend payments on $2 billion of unsecured debt, beginning with an installment due today, Emergency Manager Kevyn Orr said Friday.

With Friday’s missed $39.7 million payment on debt issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive as much as 10 cents on the dollar under a deal Orr offered to more than 100 creditors and union representatives Friday.

The city would create a regional water agency to take the place of its municipally owned department, and active and retired workers would see their pensions reduced under the plan. Detroit also would spend $1.25 billion over a decade to improve services, eliminate blight and create a more livable community.

“We have to strike a balance between the legacy obligations to our creditors and our employees and retirees and the duty as a city to 700,000 residents for lights, police, fire, emergency management, cleaning the streets,” Orr told reporters after the meeting.

Highlights of Orr's report:

--Imposed a payment moratorium on $11.5 billion of unsecured debt, including a $34 million payment due on Friday for $1.43 billion of taxable pension certificates of participation (COPs).

— Creditors holding $650 million of Detroit unsecured general obligation (GO) debt and about $1.4 billion of COPs, as well as claims by pensions underfunded by $3.5 billion and undetermined claims for retiree healthcare, would be satisfied with pro rata shares of $2 billion of new, non recourse participation notes paying interest of 1.5 percent a year;

— Owners of $480 million of Detroit secured general obligation bonds and other secured debt be treated in line with the value of collateral, with the biggest holders of secured securities accepting new bonds;

— Public pension fund obligations be overhauled to align with the city’s available funding;

— Changes be made in retiree healthcare insurance, which would see many former city workers getting coverage through Medicare and the healthcare exchanges being organized under President Obama’s healthcare reforms;

— Detroit continue to stay current with obligations to city workers and vendors;

— Officials establish an oversight board to ensure changes in finances and operations are long lived;

— The city’s water and sewage operations, which serve Detroit and 127 suburbs, be run by a separate entity called the Metropolitan Area Water and Sewer Authority, or MAWSA, that will issue new bonds to replace outstanding debts totaling about $5.4 billion.

Source: Office of Emergency Manager, City of Detroit

Orr was appointed by Republican Gov. Rick Snyder to oversee Michigan’s largest city, the former auto-manufacturing giant that is home of General Motors. Under Orr’s offer, made in a meeting at a Detroit Metropolitan Airport hotel, creditors must decide whether to accept deep losses or try their chances in court, where federal law may trump Michigan laws that protect bondholders.

Detroit, where officials struggle to provide public safety and even street lights, joins California cities Stockton and San Bernardino in trying to stick bondholders with a loss. Jefferson County, Ala., on June 5 reached an agreement to end the current record municipal bankruptcy by offering its largest creditors 60 percent of what they’re owed.

According to Orr’s 128-page proposal, the $11.5 billion in unsecured claims include $5.7 billion in post-retirement benefits, $1.43 billion in pension obligation certificates and $530 million in general-obligation bonds.

The halted debt payments may extend to the unlimited-tax and limited-tax general obligations. Such debt is backed by Detroit’s full faith and credit and taxing authority, rather than a defined revenue stream.

“It’s going to have an impact” on the $3.7 trillion municipal-bond market, said Bill Nowling, Orr’s spokesman, said in an interview before the meeting 20 miles outside Detroit. “But we’re at a crossroads.”

Nowling wouldn’t say whether the city would miss its next general-obligation debt payment, saying it is “going to go month to month.”

About $479 million of general-obligation debt is considered secured because it’s supported by state aid and is “subject to negotiation with holders,” Orr’s report said.

Detroit has about $5.3 billion of municipal bonds backed by revenue from its water and sewer systems, according to the report.

New long-term bond sales from the Detroit Water and Sewerage Department would come from a newly-formed Metropolitan Area Water and Sewer Authority, according to the report. The agency would operate the system and the city would continue to own the assets.

The plan will enable negotiations that Orr said may last through August. If progress stalls, Orr can file for Chapter 9 bankruptcy, a move he has said he wants to avoid.

“We think there may be some room for negotiation, but not a lot,” Orr said today. “ We don’t have a lot of extra cash or a lot of elasticity.”

A 2012 state law gives Orr authority to cut spending and services, and to impose new terms for employee contracts, including wages and benefits. He also can sell assets and would be the city’s representative in bankruptcy.

Active and retired city workers will face “significant cuts in accrued, vested pension amounts,” according to the report, which said that the general retirement system and police and fire system are underfunded by about $3.5 billion.

Orr’s proposed concessions stem from a May 12 preliminary report in which he detailed the dire finances of a shrunken city of 701,000 that’s kept itself afloat only by borrowing and skipping payments to pension funds. Since 2008, the city has spent an average of $100 million more than its revenue each year, according to the report.

The long-term liabilities drain money from a $1.1 billion general fund, the report said.

Detroit’s revenue fell as its population declined and home values dropped. Once among the top 10 U.S. cities by population, it has lost more than a quarter of its residents since 2000, to about 701,000 last year. That’s fewer than half its postwar peak of 1.8 million in 1950.

The city’s income-tax receipts have dropped 40 percent since fiscal 2000, to $233 million in 2011, while the jobless rate has tripled and property values declined.

State aid has fallen 48 percent, to $173 million in 2012 from a peak of $334 million in 2002, the report shows. Unemployment at 18 percent in June 2012 was almost double the state average rate of 9.3 percent at that time.

“We’re starting our first step,” Orr said. “This isn’t meant to be hostile or it’s not meant to be combative. This is meant to be an acknowledgment and a recognition of the realities that we can no longer deal with.”

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